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Uniform Rentals Suggest Extended Job Gains

Investor argues performance of uniform-rental companies is good gauge of U.S. hiring trends.

Cintas Corp. and UniFirst Corp. may show the U.S. labor market is extending its two-year rebound when they release quarterly results in the next five weeks.

Investors such as Lawrence Creatura at Federated Investors Inc. watch uniform-rental companies to gauge hiring trends for employees in manufacturing, automotive, hospitality and similar work. Even though these jobs account for only about 10 percent of employment, optimism in this industry can be “really symptomatic of the health of a wide swath of American businesses” they serve, said Creatura, who helps to oversee $370 billion as a fund manager in Rochester, New York.

Hiring among workers who wear uniforms grew 64,000 in October, the most since January’s 88,000, according to an index created by Robert W. Baird & Co. Job gains at these businesses rose 2.2 percent from a year earlier to 31 million, outpacing the 1.5 percent increase for all nonfarm payrolls, Baird and Labor Department data show. November jobs numbers will be released Dec. 7.

Cincinnati-based Cintas is scheduled to announce fiscal second-quarter earnings Dec. 20, followed by UniFirst, in Wilmington, Massachusetts, with fiscal first-quarter results on Jan. 4. Revenue for G&K Services Inc. -- the third publicly traded player in the industry -- rose 6.1 percent to $222.4 million in the three months ended Sept. 29, driven by growth in rental operations and direct sales, the company said Oct. 30.

The uniform-rental companies are “growing healthily,” largely because of new customers and selling additional services to existing ones, though they still await a significant pick-up in client payrolls, according to Andrew Steinerman, an analyst in New York at JPMorgan Chase & Co.

“These companies have done a great job,” Steinerman said. “You have to respect that these guys are growing about 5 percent, mostly because of new sales.”

Still, Cintas, UniFirst and G&K Services are showing only a “modest expansion” in their current customer base, which is reflected by the “slightly under 2 percent” annual growth in JPMorgan’s uniform-services labor index, he said.

Their shares are trading “pretty close” to historical average valuations on a price-to-earnings basis, said Andrew Wittmann, an analyst at Baird in Milwaukee. “These stocks have all done pretty well so far this year, maybe better than expected.”

While these uniform suppliers are comfortable that current trends are enough to grow their businesses, Wittmann maintains “neutral” recommendations on these stocks. Hiring has been “good but not great” this year, he said. Still, “it’s not changing fast enough to improve the operating environment.”

None of the three companies is predicting a material change during 2013 in the so-called add-stop metric: a ratio that measures net change in customer payrolls, he said.

An improvement probably would provide a “big boost” to revenue and margins, Steinerman said, adding that merchandise amortization -- the related costs when new uniforms are put into service -- gradually is waning, though it’s still a drag on profitability.

The presidential election removed a primary source of uncertainty for business owners, and the labor market is posting modest growth even with the looming fiscal cliff, Wittmann said. The U.S. faces more than $600 billion in higher taxes and spending cuts that take effect in January 2013 unless Congress acts.

Reaching an agreement with President Barack Obama could remove an impediment to growth, while failure to do so “would pose a substantial threat to the recovery,” Federal Reserve Chairman Ben S. Bernanke said Nov. 20 at the Economic Club of New York.

These and other concerns, including Europe’s sovereign debt crisis, make U.S. business leaders feel “very unsettled,” Creatura said. Nonfarm employers added 100,000 workers in November and the jobless rate was 7.9 percent for a second consecutive month, according to the median estimates of economists surveyed by Bloomberg News. That follows four months of hiring gains that averaged 173,000, according to figures from the Labor Department.

The “coin’s still in the air” regarding the durability of the U.S. expansion, so investors need tools to get a sense of the “trajectory of employer psychology,” Creatura said. Data from uniform companies, along with other job-related figures, help to “create a mosaic that is more reliable than any single data point.”

Little Benefit

G&K Services is getting “very little benefit from gains in its base,” as its add-stop metric has fluctuated marginally between positive and negative in the past year, said Jeff Huebschen, director of investor relations. More than 1 million employees working in a “fairly broad swath of the economy” wear uniforms supplied by the Minnetonka, Minnesota-based company, he said.

More of G&K Services’ customers reduced headcount than added to their payrolls in the three months ended Sept. 29, resulting in a “slightly negative” add-stop ratio for the period, Huebschen said. Anecdotally, some employers said the Nov. 6 election and fiscal cliff made them cautious, though “it’s hard to say” whether this affected the quarter.

While G&K Services still is awaiting “robust growth in the labor market,” Huebschen said the company has been able to expand by adding new customers, selling more services to current ones and initiating “a bit” of price increases.

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